Global Tax Reform Alert
The OECD has published its long-awaited Technical Commentary, accompanied by illustrative examples, explaining the application and practical implementation of the Global Model Anti-Base Erosion (GloBE) Rules under the second pillar, published in December 2021.
In the same press release dated March 14, 2022, the OECD launched a public consultation seeking feedback from interested parties on the Implementation Framework, which will facilitate the coordinated implementation and administration of the GloBE rules. Stakeholder input, to be provided by April 11, 2022, will be essential for the OECD to identify effective coordination of rules and preserve consistent outcomes for multinational enterprises that avoid the risk of double taxation. .
Just a day after this publication, EU finance ministers publicly debated the proposed EU directive to ensure an overall minimum level of taxation for multinational groups in the EU (the Pillar 2 Directive ).
The new compromise text introduces the following key changes compared to the initial EU proposal:
- The deadline for transposition of the rules is postponed to December 31, 2023, which means that the IIR would enter into force for financial years beginning on or after December 31, 2023 instead of January 1, 2023, as initially proposed, and the TURPs for financial years years beginning on or after December 31, 2024.
- Member States in which there are less than 10 groups of parents in the scope of the second pillar can choose not to adopt the IIF and the UTPR before 2025.
EU finance ministers aim to formally adopt the Pillar 2 Directive at their next meeting on April 5, 2022.
Generally, the commentary provides in-depth technical advice on the model rules, including the scope of the rules, the order of the rules, the calculation of GloBE income or loss and adjusted covered taxes, the calculation of the rate of GloBE effective taxation and tax, compliance instructions and transition rules. The commentary also covers how the rules will work in the context of corporate restructuring and holding structures, as well as how they will interact with tax neutrality and distribution regimes.
Here are six topics found in the commentary that are particularly relevant to multinational companies and other stakeholders:
1. Income inclusion rule and GILTI compliance
In the absence of legislative progress in the United States regarding the US GILTI rules, the commentary is silent on guidance regarding the compatibility of GILTI with the GloBE rules. The commentary does, however, provide details on the definition of a qualifying income inclusion rule. A qualified income inclusion rule refers to a set of rules implemented in national law in accordance with the GLoBE rules. In addition, the commentary indicates that additional guidance will be provided outlining a process to assist jurisdictions in determining whether they have introduced a qualified income inclusion rule.
2. The income inclusion rule and the CFC rules
It is intended that the GloBE rules will apply after the application of the subject-to-tax rule and national tax regimes, including CFC tax regimes. Taxes paid on income derived from a jurisdiction, including under CFC schemes, are taken into account for the purpose of calculating the GloBE effective tax rate in that particular jurisdiction. In other words, the taxes that a country applies to a domestic company’s offshore CFC income are generally allocated to that foreign entity, essentially increasing the effective CFC tax rate.
Although the revenue inclusion rule is similar to the CFC rules, it could still be important even when groups are already subject to the CFC rules.
As mentioned above, the commentary does not specify whether the US GILTI would be considered an SEC tax regime under the second pillar rules in the event that the proposed amendments to GILTI, which would align the regime with the income inclusion rule , would not be adopted by the United States. Congress.
3. Complementary Minimum Qualified Domestic Tax
The qualified domestic minimum supplemental tax provides a low-tax jurisdiction with the primary taxing right to the supplemental tax. Therefore, the qualifying additional national minimum tax precedes the income inclusion rule. It is expected that many jurisdictions will preserve their right to levy their local top-up tax by introducing an eligible national top-up tax. For example, Switzerland has proposed to introduce such a tax in its recently published guidelines for the implementation of the second pillar in Switzerland.
4. Pre-regime losses – tax attributes upon transition
The Model Rules indirectly addressed the treatment of losses carried forward before the regime through a transitional rule that would take into account existing deferred taxes as an approach to dealing with temporary differences.
The commentary confirms this approach and does not seem to introduce any limitation to carryovers. In this regard, the commentary reinforces a principle originally stated in the Blueprint, that “failure to appropriately account for operating losses that the MNE Group has incurred in the period(s) preceding its subjection to the GloBE rules could give a distorted image of the tax position of the MNE Group in this jurisdiction and may subject the MNE Group to taxation in excess of its economic profit.
5. Currency conversion
The commentary explains why the euro is used to set the GLOBE thresholds and recommends that jurisdictions use the euro when implementing the new rules into their domestic law. However, if a jurisdiction encounters legal or practical impediments to the use of a foreign currency when setting its own monetary thresholds, it may provide a threshold in its national currency. In such a case, the relevant jurisdiction should rebase the local currency threshold each year based on a consistent methodology to minimize the difference between the local threshold and those set by other countries.
The same principle applies to a multinational enterprise group that prepares its consolidated financial statements in a currency different from that fixed by national legislation. The MNE group should convert the relevant amounts into local currency using an agreed methodology that provides a level playing field for MNEs and maximizes consistency of results across jurisdictions.
6. Refundable and non-refundable tax credits
An issue for many companies that will be subject to the GloBE rules is the treatment of tax credits in calculating the minimum tax rate of 15% per jurisdiction. After the publication of the Model Rules in December 2021, a number of business organizations submitted comments on the provision of the Model Rules which allows for an adjustment to consider only refundable tax credits in the calculation of the tax rate. effective taxation. The comments noted that since the UTP no longer requires that there be a transaction between two related parties before the UTP can apply, many ultimate parent entities in the United States and other countries that incur significant R&D expenditures could fall below the effective minimum tax rate in their home jurisdiction. , since R&D credits are non-refundable in the United States and many other countries. The commentary does not respond to these comments and only treats refundable credits as eligible for the purposes of calculating the minimum effective tax rate.
A toolkit for the international tax community
With this publication of the OECD commentary, the international tax community essentially has the toolkit and guidance at its disposal to assess the significant tax impacts of the second pillar rules.